A Stimulus for Working Fewer Hours

More than 12 million workers in the United States are currently unemployed, with the number rising rapidly. The problem with the economy is that we can produce more goods and services than is being demanded. The way we generally deal with lack of demand is to lay people off, leaving a relatively small segment of the work force (the unemployed) to bear the pain of our economic problems.

An alternative would be to have everyone share in the adjustment to excess supply by reducing work hours. Fewer work hours would mean roughly proportionate reductions in pay, but there would be the offsetting benefit of more leisure time. Workers would have more time to spend with their families or in nonwork activities. This would bring us more in line with the rest of the world, where the standard workweek and year is considerably shorter.

Shorter hours can also be associated with more flexibility in hours making the workplace more family friendly. It may also be more environmentally friendly by reducing the congestion at rush hours and perhaps leading companies to reduce the number of commutes by allowing four day workweeks.

One reason that firms are reluctant to go the route of shorter hours is that many costs, particularly health care insurance, are typically paid per worker rather than per hour. This gives firms a strong incentive to maximize the amount of work they get out of each worker. Health care reform is an obvious long-term answer to this problem but in the short term it suggests that the government can play a useful role by providing an offsetting incentive to reduce work hours.

This can be an important part of a new stimulus package. Effectively, the government would be paying people to work less. This can be done with modest employer tax credits, for example, the government could give a credit of up to $2,500 or 10 percent of a worker’s time to cover paid time off for workers. (This credit would cover 10 percent of the pay of someone earning $25,000 a year or less.) The paid time off can take the form of paid family leave, paid sick days, paid vacations, shorter standard workweek, or some combination.

The arithmetic on this is very straightforward. Suppose employers of 50 million workers reduced work time by an average of 5 percent. Demand would be little changed, since workers are still getting paid almost the same in spite of their shorter hours. With these workers putting in 5 percent fewer hours, and demand unchanged, employers should want to hire (or not lay off) roughly 5 percent more workers, or 2.5 million workers. (The impact on total employment is the same whether this tax credit averts layoffs or leads to new hires.)

This would be a quick bureaucracy-free way to reduce the unemployment rate at a relatively low cost (a $2,500 credit for 50 million workers would cost $125 billion a year). In addition to the short-term benefit, there could be a long-term benefit in that workers and employers may like the new work arrangements and keep them in place after the tax credit is removed.

At this point, few people in Congress are actively discussing further stimulus. Of course, Congress has underestimated the severity of this downturn all along, passing a stimulus package in 2008 that everyone now concedes was inadequate. This will soon be the case with the more recent package. When Congress again realizes its mistake, there may be interest in a pay for play tax credit as the quickest and best way to get the economy back to full employment.